An Incentive Based Regulatory System: A Bridge Too Far

Rahul Dhumale

Working Papers from Centre for Business Research, University of Cambridge

Abstract: This paper argues that the operation of the financial sector as a whole will not be as effective if market discipline is relied upon as the only tool of financial regulation. Before enacting any incentive mechanisms, there must be adequate built-in measures to prevent the exploitation of information asymmetries as well as greater harmonisation and co-ordination of regulatory standards between countries. The paper considers the "incentive problem" in regulation using a principal-agent framework and the design of an incentive compatible regulatory system which encourages prudent behaviour and efficient financial intermediation. The discussion continues by assessing the nature of the trade-off between incentive and rule based regulation by analysing the interaction between regulatory and agency incentives. The paper concludes by considering the challenges in designing appropriate incentive mechanisms to regulate financial markets.

Keywords: Incentives; Market Discipline; Financial Regulation (search for similar items in EconPapers)
JEL-codes: G28 G29 G38 (search for similar items in EconPapers)
Date: 2000-06
New Economics Papers: this item is included in nep-cfn and nep-reg
Note: PRO-1
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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Persistent link: https://EconPapers.repec.org/RePEc:cbr:cbrwps:wp170

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